Qualified Opportunity Funds Self-Certification News

The IRS released Opportunity Zone FAQs on April 24, 2018 explaining that an eligible entity will be able to self-certify to become a Qualified Opportunity Fund (QOF) by filing a form to be released this summer with its timely filed (including extensions) federal income tax return for the taxable year.

As part of the extensive Tax Cuts and Jobs Act of 2017 (TCJA), Congress created a little known but beneficial tax program to incentivize investments into “qualified low-income communities” aka Qualified Opportunity Zones designated by the governors of each state. The investment is made through a QOF which is generally a privately managed investment vehicle organized as a corporation, partnership or limited liability company for the sole purpose (at least 90 percent of its assets) of investing directly into a certified qualified opportunity zone property. The IRS has issued a Revenue Procedure, but more rules will follow this summer.

Similar, but in many ways more advantageous, to Section 1031 tax deferred or like-kind exchanges, taxpayers who roll over (re-invest unrealized capital gains) sales proceeds within 180 days of the sale or exchange of non-zone assets (including stock, partnership interests, real estate and property used for personal purposes) before December 31, 2026, will be able to take advantage of the beneficial tax treatment this provision provides. The tax incentives available to investors in QOFs are significant. First, investors can defer capital gains taxes until the earlier of the date on which the QOF investment is sold or exchanged, or December 31, 2026. Second, capital gains taxes are reduced when the investment is maintained for at least 5 years, and additional tax cuts are available for investments held for periods of 7 and 10 years. Third, if the investor holds the investment in the QOF for at least 10 years, the investor is eligible for an increase in basis equal to the fair market value of the investment on the date that the investment is sold or exchanged. Additional, more complex incentives may also be available.

Here is the link to a map of all of the OZs that have been designated, including the 117 in Oklahoma chosen by our Governor. The investment must be in one of these zones via a QOF. Criteria the Governor used in selecting the OZs included community interest and support for additional investment, the potential of at least one “ready to go” or otherwise identifiable project, and that the identified project addressed one of the following target uses: industrial/business development, housing, or agriculture.

Now we know that the IRS will establish a simplified QOF certification process that real estate investors should find attractive. Self-certification should result in a fast and less expensive process for investors and sponsors of QOFs. Just how simple and inexpensive this process will be, of course, depends on what is required in the actual tax form released by the IRS.

Huddleston Law Offices will monitor guidance from the IRS on Opportunity Zone Funds and provide updates when guidance is released.

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